By Jack Dunkelman and Nathasha Soon
In just one year, China has become the top issuer of green bonds in the world. According to a report from Moody’s, Chinese institutions issued $7.9 billion in bonds in the first quarter of 2016, making up nearly half of the bonds issued globally.
Ma Jun, Chief Economist at the People’s Bank of China (PBoC) and Chairman of China’s Green Finance Committee, spoke at AmCham China on June 2 and remarked on what the Chinese green bond market has achieved in just one year. The first Chinese green bond was issued by the Agricultural Bank of China and listed on the London Stock Exchange in October 2015. Green bonds are just one recent development in the larger world of green finance, and one of the major ways China is directing private investment toward green projects.
Green bonds are intended to fund projects in green sectors, though the specifications for what projects qualify as “green” remains a topic of discussion. These bonds, which have a maturity of three to five years, are an important tool of China’s financial system in mitigating the country’s environmental issues. In order to incentivize private investment in the green sector, in areas such as environmental remediation, clean energy and energy efficiency, Ma said that further efforts must be made in banking, finance, policy and regulations.
Alongside Ma, Robert Liu, CEO of Huaneng Invesco WLR, Zhu Shouqing, Senior Associate and Head of China Sustainable Finance Program at World Resources Institute (WRI), and Kevin Mo, Managing Director of the Paulson Institute, also spoke at the AmCham China panel discussion on the future of the green sector in China. Li Jianbo, Chair of AmCham China’s Financial Services, and Jim Stover, Co-Chair of the Clean Technology Forum, co-organized the event.
Public dissatisfaction with pollution is one of the primary driving forces behind greening China’s financial system.
"In China, air pollution, water pollution and land contamination caused very strong public demand for improvement,” Ma said. Environmental problems continue to financially burden a slowing Chinese economy, which faces billions of dollars every year in expenses caused by pollution.
China, however, remains optimistic about its capacity to effect change. The 13th Five-Year Plan sets forth ambitious goals in improving renewable energy usage, increasing energy efficiency and reducing carbon emissions. PBoC estimates that meeting these aims will cost RMB 2 trillion through 2020. The Chinese government will only be able to cover 15 percent of this, meaning that capital must come from other sectors for a green economy to successfully develop.
The issue with clean energy projects is not a lack of available funds. In fact, there is strong interest in green sector investment from the private sector, particularly since the beginning of 2016, Zhu noted. The problem is that there can be a mismatch between private capital and green projects. Investors look for high returns on investment and are therefore hesitant to put money into green projects which exist outside of prevailing business practices.
“We need to put into place good regulations … to make sure that the proceeds from green bonds issuance indeed go to green business rather than used to beef up corporate balance sheets,” Zhu said.
Risks of green financing
To investors, green technology can look like a risky venture, Zhu said. Investment returns on green projects are typically long-term, taking 30 to 50 years to yield profitable results. Local firms are cautious to enter into unfamiliar projects with high upfront costs. Additionally, the low cost of energy in recent years has reduced incentives for investors to adapt towards environmentally sustainable business practices.
Banks now must also adapt.
“Loan officers need to know green business intimately so that they can assess the probability of default in their loan portfolio,” Ma of PBoC said. Thus, increased specialization of banks in green lending will also help in the transition to eco-friendly practices.
Development banks, such as the Asian Development Bank, can play a helpful role by demonstrating how energy projects may yield high returns for investors. Bloomberg estimates that green projects will have potential earnings of approximately RMB 1.5 trillion within the next five years.
Clearing the path for more green tech
The speakers at the AmCham China event shared ideas for how to improve the development of green financing. Ma said the introduction of lender liability laws would create joint responsibility between lender banks and receiving companies, thus discouraging the financing of polluting projects and holding banks accountable for environmental damage.
Zhu has a positive outlook on how the law will impact behaviors in the market.
“With changes in the legal system in China, companies will have to alter their behavior,” Zhu said. Additionally, compulsory disclosure, transparency regulations for publicly listed companies and mandatory green insurance programs are further requirements that could hold companies accountable for their actions.
Zhu stressed the importance of information disclosure. “More should be done in the future so that investors know which firms they should choose in order to be green,” he said.
While China still has a long way to go in addressing environmental challenges, the country holds a prominent role in the development of green finance infrastructure. And as the host of the G20 Summit this September in Hangzhou, China is uniquely positioned to advocate for more green finance innovation.
Jack Dunkelman and Nathasha Soon are summer interns at AmCham China.